]]>The scale of the ATO’s property data-matching program announced on 15 December 2015 is breathtaking!

Under the data-matching program the ATO intends to obtain data from various State Revenue offices and tenancies boards for the period 20 September 1985 to 30 June 2017 (ie from the start of the regime until 2 years from now!!). It will include such information as the rental bond number or identifier, the full name and address of the landlord and the period of lease, as well as the date of any contract of property sale and relevant valuation details. Further, the ATO expects that around 31 million records for each year will be obtained and that records relating to 11.3 million individuals will be matched.

And for those taxpayers who have failed to return capital gains from property transactions, the consequences could be quite dramatic – even for those who may have unwittingly failed to do so in view of the apparent complexity of the relevant CGT rules. However, the more interesting issue is the fact that where a taxpayer makes a choice to apply any one of the myriad of CGT concessions which enable them to negate in whole or part a CGT liability on a property, and particularly a main residence, this choice is merely reflected in the way the taxpayer lodges their return for the relevant year.

This in turn may mean that if the ATO comes knocking in respect of any undeclared property gain, a taxpayer may well be able to raise the “defence” that one of these concessions was in fact chosen to justify the non-return of the gain regardless of the taxpayer’s real intention at the time. Alternatively, it may be possible for a taxpayer to seek an amendment of a return to apply or “undo” any such choice to their benefit.

These issues are discussed in an article by Kirk Wilson in Thomson Reuter’s Weekly Tax Bulletin No 1 of 2016 of 8 January 2016 (as well as in Thomson Reuters CGT Handbook 2015-16 at paras [9 420] – [9 460]).

]]>The recent decision of the Federal Court in Orica Limited v FCT [2015] FCA 1399 serves as something of a warning to those company groups that arrange inter-corporate loans in circumstances where the arrangements may seem artificial or contrived and directed primarily at obtaining a tax deduction – even if there may also be an objective of improving the overall economic or net asset position of the corporate group.

In that case, as reported in Thomson Reuters Weekly Tax Bulletin (Issue 52, 11 December 2015), the Federal Court held that Pt IVA applied to deny an Australian corporate taxpayer interest deductions of some $112m on an inter-corporate loan made to it by another subsidiary in the group. In doing so, the Court dismissed the taxpayer’s claim that the dominant purpose of the arrangement was not to obtain a tax benefit in the form of an interest deduction, but to improve the overall economic welfare of the group by allowing the loan to be used by the corporate group to generate other income that could then absorb “unbooked” US tax losses of some A$52.9m that it could not otherwise use.

In arriving at its decision, the Federal Court noted a number of “standard” matters about the operation of Pt IVA. But more importantly it emphasised that the resulting changed financial position of the group was not occasioned by “ordinary business dealings with third parties”, but instead by an inter-corporate loan which had a high degree of “uncommerciality” about it – particularly as the arrangement was entered into at, and extended over, a time when the group had substantial tax losses, and was wound up once those losses were used.

Accordingly, as has been regularly said by the Courts in various Pt IVA cases, if the arrangement (in this case inter-corporate loan) would “make little sense” without the accompanying tax benefits, then it seems that taxpayers need to be very careful.

]]>Caution to Australian property investors: when negative gearing isn’t on your sidehttp://taxinsight.thomsonreuters.com.au/caution-to-australian-property-investors-when-negative-gearing-isnt-on-your-side/
Fri, 17 Apr 2015 05:24:54 +0000http://taxinsight.thomsonreuters.com.au/?p=6645Originally published in Australian Property Investor With all the talk about whether negative gearing should be abolished or limited in some way to help take Read more...

With all the talk about whether negative gearing should be abolished or limited in some way to help take the heat of the Australia’s residential property market, Australian property owners and investors may be unaware that negative gearing is already impermissible in some cases.

Here’s the key cases to watch out for:

Common case

The most obvious example is where a property owner lets their property to someone well below the market rate. This usually occurs where the parties are related, for example, where parents allow a child to live in their rental property for below market rate where the rent, say, covers costs such as electricity, water and rates.

In this case, the Tax Commissioner takes the view that that the property owner can only claim deductible expenses up to the amount of “rent” paid so that there is neither a negatively geared loss nor assessable income.

Less common case

The other less well understood (but similar) situation is set out in ATO’s Tax Ruling TR 95/33. When the property is not intended for generating a positive cash flow, instead of being able to negatively gear the property, it will be necessary to “apportion” the deductible outgoings on a “fair and reasonable” basis to prevent a person from claiming a negatively geared loss.

In the current heated property market, this can occur in the not uncommon situation where a couple borrows a significant amount of money to purchase “the worst house on the best street” with the intention of knocking it down to build their “dream home”. In this case, it is also not uncommon for them to then rent the house to the existing owners in the interim until they get their building and other plans in order – and to do so below the market rate, especially as it is only intended to be a temporary measure.

It is then not uncommon for the couple to make the mistake of thinking that they can negatively gear the property in this period!

Instead, the Tax Commissioner will take a different view, and that some form of apportionment of deductible expenses is needed (and usually in the same manner that applies where a property is rented at below market rated to a related party).

The Tax Commissioner takes this approach on the basis that there will be a “significant disproportion between the deductible outgoings and the assessable income” over the period it is rented and, moreover, in terms of the property owner’s intention, the property is clearly never intended to be positively geared.

A ‘fair and reasonable’ outcome

This is a “reasonable” outcome in the eyes of the Tax Commissioner, as the expenditure incurred by the purchaser in this case, is more akin to short-term “holding costs” until the couple’s new home is built – especially as the home will become a private asset and not a business one.”

However, it is important to stress that disallowing of “negative gearing” only comes about in this situation because of the unique circumstances that exist – namely, the “disproportion” between the deductions and the assessable income over the period (i.e. where deductible expenses will “far outstrip” the assessable rent over the period) and the absence of any intention to ever produce a positive income in view of the intended short-term nature of the arrangement.

In other words, as the arrangement does not have the “normal” features of a negatively geared investment property arrangement, the Tax Commissioner may well deny any of the benefits of negative gearing.

In sum, it is something that purchasers of such properties in Australia may not be fully aware of, but should make further enquiries about – especially if for some reason the purchaser’s budgeting arrangements may in some way reliant on gaining short-term negative gearing benefits.

The content of this article is intended only to provide a summary and general overview on matters of interest. You should seek legal or other professional advice before acting or relying on any of the Content.

]]>Beware of granny flat tax implicationshttp://taxinsight.thomsonreuters.com.au/beware-of-granny-flat-tax-implications/
Fri, 20 Mar 2015 02:31:53 +0000http://taxinsight.thomsonreuters.com.au/?p=6526This article was published first on Australian Property Investor. With the relaxation of property development laws in NSW (and elsewhere across the country) and house Read more...

With the relaxation of property development laws in NSW (and elsewhere across the country) and house prices showing no signs of tapering off any time soon, granny flats are becoming an increasingly popular phenomena around Australia. What real estate investors and homeowners may need to consider are some of the important CGT (capital gains tax) implications associated with such arrangements that can be easy to overlook.

These tax implications can be as various as the range of scenarios in which granny flats can be built and occupied – from the “plain-vanilla” arrangement, where a granny flat is occupied by a family member, to the case where a “business” of building and/or letting out granny flats is being carried out.

In the case where a family member on a non-commercial basis occupies a granny flat, should that home be later sold, a full CGT main residence exemption will still be available. This is because the CGT main residence exemption extends to “adjacent land” of up to two hectares to the main dwelling, provided it “was used primarily for private or domestic purposes in association with the dwelling” – as in this situation.

However, if the granny flat was leased at commercial rates, a partial main residence exemption would “kick in” on the basis that the dwelling was being used for producing assessable income.

In terms of calculating the capital gain (or loss) in this situation, if the home would have been entitled to a full main residence exemption “just before that time of first income use”, then any partial exemption would be calculated by reference to the “market value” of the home at the time of this first income use – together with an appropriate apportionment of any resulting capital gain (or loss) for the extent of time and the area of the adjacent land that was used for this income-producing purpose.

But the CGT 50 per cent discount would be available to reduce any assessable gain if the home was owned for more than 12 months since that time of first income use.

It’s also important to realise that if part of the backyard on which the granny flat exists is subdivided and sold there’s a specific rule in tax law which provides that the CGT main residence exemption won’t be available in this case of “adjacent land to a main residence being sold separately from the dwelling” – regardless of whether the land contains a granny flat or not or whether it has been let out at commercial rates or not. Nevertheless, apart from the CGT 50 per cent discount, if the adjacent land has been owned for more than 12 months, other favourable adjustments would be available. For example, in most cases any non-deductible mortgage interest attributable to the land could be included in the cost of the land for CGT purposes, as well as costs associated with its sale (e.g. subdivision costs).

Finally, for those in the “business” of constructing and letting out and/or selling granny flats, the story is entirely different: any gains would be first assessed as ordinary income or profit, instead of under the CGT regime.

This of course illustrates that the tax implications of granny flats can be as various as the range of scenarios in which granny flats are built and used and the need to obtain good tax advice on the matter.

The content of this article is intended only to provide a summary and general overview on matters of interest. You should seek legal or other professional advice before acting or relying on any of the content.